Technology Acquisition, Increased Cash to Drive M&A Growth in 2018

Save Article

Corporate and private equity (PE) executives foresee an acceleration of M&A activity this year, both in the number of deals and size of transactions, with large companies expected to drive deal activity, according to Deloitte’s fifth annual M&A trends report.

Russell Thomson

The report also identifies trends expected to be key drivers of deal-making activity, including technology acquisition becoming the new No. 1 strategic reason for M&A pursuits, acquisitions topping companies’ intended use of rising cash reserves, and deal-makers’ rising use of non-spreadsheet based M&A technology tools in their deal-making process.

“For many corporations and private equity ﬁrms, deal ﬂow is poised to increase—and deals likely will be larger, with virtually unanimous sentiment among the 1,000 executives surveyed for the report that deal size will increase, if not stay the same, compared with deals brokered in 2017,” says Russell Thomson, national managing partner, Mergers & Acquisitions Services, Deloitte & Touche LLP.

Susan Dettmar

Nearly 70% of executives at U.S.-headquartered corporations and 76% of leaders at domestic-based PE firms who were surveyed said deal flow will increase in the next 12 months. The survey also found that corporate executives and PE investors from the largest firms—with revenues and investments in excess of $1 billion—are considerably more confident than their smaller counterparts that they will engage in bigger deals in the coming year.

Deal Success Rising

A relatively small percentage of corporate respondents (12%) say that a majority of their M&A deals are not generating the expected return on investment. “That is a significant change from the spring, 2016 survey, when nearly 40% of corporate respondents said their deals were missing the mark,” observes Susan Dettmar, principal, Deloitte Consulting LLP, and leader of Deloitte’s M&A Consultative Services practice.

Mark Garay

For the second straight year, respondents also cited effective integration, accurate valuation and economic certainty as the three most important factors for a deal’s success. “Our surveys consistently show that well-planned, carefully-executed integrations yield transaction success, and our findings on improved deal outcomes indicates companies are improving in those areas,” notes Mark Garay, managing director, Deloitte Services LP, and chief of staff for the U.S. Merger and Acquisition Services practice. “In the latest survey, respondents cited the speed of decision-making and added aligning cultures as key areas of concern, along with change management, the quality and timeliness of data, and capturing synergies,” he adds.

Seven Key Trends Impacting M&A in 2018

An analysis of the survey findings revealed seven key trends likely to define the M&A landscape in 2018.

1. Technology acquisition is the new top driver of M&A pursuits. Corporate respondents report diverse motivations for pursuing deals, with acquiring technology assets (20%) topping the list of drivers, followed by expanding customer bases (19%), adding products and services (16%), and strengthening digital strategy (12%). Talent acquisition has more than doubled in importance from the previous survey conducted in the spring, 2016, growing from 4% to 9%. Some plan to seek major, transformational deals (17%). Others say they are on the hunt for smaller, strategic opportunities (15%).

2. M&A is the No. 1 intended use of rising cash reserves. Over the past two years, 65% of corporate respondents said their cash reserves have increased (and this was before tax reform was passed), and 40% of respondents say that M&A is their number one intended use of cash reserves. Markedly fewer respondents (14%) expect to use their cash to buy back stock.

3. More deals are generating expected returns. Companies appear to be getting better at achieving their deal goals. Overall, only 1 in 10 respondents say that more than half their deals did not deliver the return on investment they had anticipated. That is significantly down from the 40% who said more than half their deals did not deliver in the spring 2016 survey. Among corporate respondents, 12% said that more than half of their deals did not meet expectations, down from 40% in the spring 2016 survey.

4. New M&A technology is helping reduce conflicts, costs and time. More than 6 in 10 respondents (63%) say they now incorporate the use of non-spreadsheet-based M&A technology tools as part of their deal processes. The respondents cite a raft of benefits. These analytical tools help make post-deal integration smoother and faster, reduce costs and conflict, and shorten the time it takes to complete the deals. Moreover, 62% of those who still rely on spreadsheets want to tap into these new M&A tools to integrate their acquisitions.

5. Divestitures are expected to remain in vogue. Seventy percent of both corporate and PE respondents say they plan to sell units or assets in 2018, up from 48% in the spring of 2016 survey. On the corporate side, survey respondents cite a change in strategy as their top reason to divest businesses. Compared to smaller companies, corporations with revenue over $1 billion expect an unsolicited bid for one of their non-core business units, by more than a two-to-one margin.

6.Continued industry convergence—though mainly in related businesses or vertical integration. Industry and sector convergence continue to be major themes, with a strong bias toward vertical integration. Industries that respondents predicted will experience the most convergence are life sciences and health care, technology and financial services.

7. Interest in global deals is rising, while areas of geographic interest appear to be shifting. More than 90% of respondents say they’ll continue to engage in deal activity across borders, but deal-makers indicate they will be more selective. Thirty-four percent of respondents expect one-fifth or less of their deals to be internationally focused, up from 26% in spring, 2016. Canada (39%) and the United Kingdom (29%) continue to top the list of foreign targets for PE respondents and corporates combined. PE respondents, however, ranked Central America (32%, up from 19%) and Australia (29%) as their next two targets.

There is a sharp decline in those looking to China and Japan. Only 18% of all respondents said they would pursue deals in China, down from 25% in the spring, 2016 survey.Only 14% of all respondents say they will look to Japan, down from 24% in the previous survey. Respondents said that Europe, as a whole, is less likely to draw investment interest. Interest in investing in Germany declined marginally, and there were sharp declines in those targeting companies in Italy and Spain.

For corporate respondents with revenues over $1 billion, 49% are pursuing more than 40% of their deals primarily in foreign markets. That compares to 34% of smaller corporate respondents whose targets operate principally in foreign markets.

What Could Hold M&A Back?

“Overall, the survey results point to strong deal activity ahead, but there are a few potential obstacles that could potentially slow the rate down,” notes Mr. Thomson. For example:

—Global economic uncertainty, which still tops the list of potential deal obstacles over the next 12 months, though only 20% cite it as a concern, down from 26% in the fall 2016 report.

—Capital market volatility, cited by 17% of respondents in the 2017 survey, but this is down from 21% a year ago.

—High valuation multiples, although these ticked down nominally as a leading obstacle, cited by 15% of respondents, compared to 16% in spring, 2016. It’s important to note that expectations around deal multiples have remained relatively steady, with 41% (up from 40% in spring, 2016) of respondents believing price multiples will rise for both private and public deals in the year ahead.

—Rising interest rates, although this concern dropped to 11% from 17% in the spring 2016 survey. That decline might be tied to the fact that today’s rates—despite a series of hikes by the Federal Reserve—are still quite low from a historical perspective.*

Obstacles aside, the majority of both corporate respondents and private equity investors anticipate brisker activity over the next 12 months. And if the legislative environment yields more substantive changes beyond tax reform, that might lead to yet additional deal activity.

About the M&A Trends Report

The report is the result of a survey of more than 1,000 executives, conducted between September 6, 2017, and September 24, 2017, to gauge their expectations for M&A activity in 2018 and to better understand their experience with prior transactions.

All survey participants work in either private or public companies or private equity firms with annual revenues of $10 million or greater. The participants consist of senior executives (director-level or higher) involved in M&A activity. One-third of corporate respondents work in the C-suite, while half of private equity respondents are involved in fund management.

Related Deloitte Insights

It seems like every other day the headlines announce a new merger or innovative partnership in health care—with increasing consolidation from the pharmacy benefit manager front to new disruptors entering the market. What does all of this convergence mean? Bill Copeland, vice chairman, U.S. Life Sciences and Health Care Industry leader, Deloitte LLP, looks at how convergence may be poised to address changing consumer expectations and current cost and access challenges in health care.

Stephanie Ferris was named CFO of U.S.-based Vantiv in March 2016, just 16 months before the company announced the biggest acquisition in its history: a $10 billion offer for U.K.-based Worldpay Group plc. In this interview with John S. England and Bob Bitter, both senior partners, Audit & Assurance, Deloitte & Touche LLP, Ms. Ferris discusses the challenges and opportunities presented by the acquisition and how her finance organization is addressing them. She also speaks about her career journey with Carol Larson, senior partner, Audit & Assurance, Deloitte & Touche LLP, and champion for Women in Finance for the Deloitte CFO Program.

Beyond the possible reduction in their U.S. tax liability, private companies in the U.S. may find another benefit from tax reform: being viewed as more attractive takeover targets by foreign buyers. “The strong domestic economy was already attracting more inbound investment to the U.S., and private companies may benefit the most because of recent deal dynamics, strategic priorities and current valuations,” says Steve Kimble, chairman and CEO, Deloitte Tax LLP. Learn about other provisions of the new law that could provide further incentive for U.S.-inbound deals.

Views & Analysis

Since being named CFO in 2013, Joan Binstock has led a drive to expand the contribution of finance to the firm, including new investments in people and technology. Ms. Binstock, who joined Lord Abbett in 1999 as chief operations officer, discusses the importance of broad finance and operations experience for CFOs in investment management firms, with Matthew White, partner, Deloitte & Touche LLP. She also talks about what has shaped her career journey with Carol Larson, senior audit partner, Deloitte & Touche LLP, and champion for Women in Finance for Deloitte’s CFO Program.

M&A transactions don’t always meet expectations, but an expanding array of digital tools may improve outcomes and provide CFOs with an opportunity to play a greater role in M&A strategy. CFOs are already starting to deploy such tools, based on the findings of Deloitte’s 2018 M&A trends report. Learn how these emerging digital capabilities can be applied to target screening, purchase accounting, post-deal integration and other stages of the M&A lifecycle.

More than three-quarters (80%) of corporate secretaries and governance professionals identify strategy as their primary board focus, with risk oversight coming in second at 42%, and board selection third at 29%, according to the 10th edition of the Board Practices Report from Deloitte’s Center for Board Effectiveness and the Society for Corporate Governance. The report covers many of the most pressing issues facing boards, including board composition and education, audit committee practices, new board member criteria and proxy issues.

Editor's Choice

Tax reform brought with it notable changes to Internal Revenue Code Section 162(m), the provision that limits the tax deductibility of compensation in excess of $1 million paid to “covered employees.” It also stipulates that CFOs are now automatically covered employees, subject to the revised rules. Elizabeth Drigotas, principal, Deloitte Tax LLP, and Michael Kesner, principal, Deloitte Consulting LLP, address some of the ways in which Section 162(m) rules have been modified by tax reform and potential implications for compensation strategies.

The recently passed tax legislation is expected to have significant and immediate financial reporting impacts on organizations. “The enactment of the new tax law in the closing days of 2017 presented a major challenge for publicly traded companies that are required to account for and disclose the effects of a change in tax law in the period of enactment,” notes Steve Kimble, chairman and CEO, Deloitte Tax LLP. Learn about the tax law changes that could have a significant financial statement impact, including in the areas of deferred tax assets and liabilities, recognition of a foreign subsidiary liability and tax credits.

Beyond the possible reduction in their U.S. tax liability, private companies in the U.S. may find another benefit from tax reform: being viewed as more attractive takeover targets by foreign buyers. “The strong domestic economy was already attracting more inbound investment to the U.S., and private companies may benefit the most because of recent deal dynamics, strategic priorities and current valuations,” says Steve Kimble, chairman and CEO, Deloitte Tax LLP. Learn about other provisions of the new law that could provide further incentive for U.S.-inbound deals.

About Deloitte Insights

Deloitte’s Insights for CFOs provides financial executives a customized resource to help them address the strategic, operational and regulatory issues they face in managing their finance organizations and careers, with top-line digests, research, perspectives and technical analyses.